This month hasn’t been a good one for Taleo. Here’s the timeline of events and an analysis of the lawsuits that are originating from recent events.

On 11/3/2008, the company announced its Q3 earnings and they didn’t delight Wall Street. While the company added 230 customers and reported record earnings, net income went from $2,233 million in Q3 2007 to a net loss of $ (8,151) in Q3 2008. From my quick review of their financials, one can see:

- a number of adjustments being made to account for the acquisition of Vurv (This is not unexpected)
- Sales & Marketing costs, relative to revenue seem to have grown materially since last year.
- Cash on hand has materially dropped. From 12/31/2007 to 9/30/2008, cash and equivalents has dropped to $49,004,000 from $86,135,000. That’s a reduction of about 43%.

Then, on November 10, 2008, Taleo reported that its auditors, Deloitte & Touche, LLP, wanted the firm to re-evaluate its revenue recognition processes and/or results. Taleo filed notice with the SEC that its financial filings would be late while it re-examines its books.

The stock price for Taleo is now way off the mark from its 52-week high. I looked up Taleo’s stock performance on Yahoo finance (Symbol: TLEO). This Yahoo chart (click on image to see the full picture) pretty much sums up the stock’s performance of late:

(Source of graphic: Yahoo Finance)

On November 17, 2008, Taleo and its executives were apparently sued by shareholders in US District Court for California. Plaintiffs are alleging that Taleo accelerated the recognition of revenue.

Then, on November 18, 2008, Taleo was notified by NASDAQ, the exchange where its stock is traded, that it is no longer in compliance with their listing requirements as a consequence of the delay in its reporting Q3 earnings to the SEC.

- Apparently, some Taleo executives sold off shares of stock they owned in Taleo. In the last six months, insiders apparently sold approximately $10.8 million in Taleo shares. However, the law firm is reporting that insiders have sold approximately $121 million since the company went public in 2005. My math tells me that insiders have been selling a lot more stock in earlier years than they have in this last year of 2008. Does this suggest a smoking gun? I’m not so sure. Many software executives have pre-arranged sell orders with brokerages so that these individuals can make their investment liquid and/or diversify their holdings. Most executives have these plans as the planned schedule of sales is known and controlled by the brokerage and not the executive. This is done to prevent the appearance (or reality) of insider trading. Given the magnitude of prior sales, this may be a dubious claim if the sales were triggered by third parties.

- Some measure of Taleo’s stock price decline may be due to revenue recognition concerns (real or perceived) but the timing of these events may also indicate that some of the decline is due to the corresponding decline in stock prices overall. Anyone with a stock or mutual fund portfolio is keenly aware of the recent plummets on the NYSE, Nasdaq and other exchanges globally.

- Investors are also discounting stock prices as they believe future revenue streams (and, by inference, future profit streams) will be diminished for some time as the economy will not be as robust as it was in 2007. Different investors see different timeframes for the recovery period but these lowered earnings expectations are dropping stock prices for almost every firm in the market.

The real issue here will be whether revenue was incorrectly recorded, the magnitude of the recording error, if any, and how it will affect the published financials. Given the time-intensive nature of these auditing/accounting reviews, this could be more than a year and maybe up to several years before it is resolved. The faster Taleo and Deloitte can get through this, the better for Taleo and its executives.

Does any of this reflect poorly on Taleo’s products or the Vurv solutions they purchased? No. Will it be a management distraction? Yes. Will it cost a lot of money? Absolutely. Will competitors bring this up in selling situations? Bet on it.

Brian is in a unique position to diagnosis the winners and the losers in technology and services. He was the longest running (10 years) and most senior director of Andersen Consulting's (now Accenture's) global Software Intelligence unit - a position that required him to pick the best possible software solutions for hundreds of clients gl...
Full Bio

Disclosure

I am co-owner of TechVentive, Inc. The company has been engaged on numerous consulting engagements, often for technology firms, service firms and litigators. As a general rule, I do not write about current clients of TechVentive. Should that occur, I will note this in blogs. Readers should assume that I have had client relationships with many ERP and other technology providers. Some of these relationships may be quite small and short-lived while others more significant. One of TechVentive's business units publishes research reports about technology providers. As a result, this business receives small amounts of revenues from a wide variety of software firms, software buyers and others when they purchase copies of reports. Some firms do secure reprint rights to these reports. None of these purchases, individually, represents a significant amount of total revenue for me and the nature of it is hard to predict where it will come from. I also provide some marketing strategy and/or market segmentation work for software firms as I have developed a unique database that segments the largest 4000+ technology buyers in the world. Many technology firms periodically engage me for unique views into this database for future marketing campaigns. I do not blog about these efforts and do not blog about client firms while they are active clients unless some pressing news story erupts. If that event occurs, I will indicate any perceived or real conflict of interest. Occasionally, I will develop unique intellectual property pieces for technology or service providers. If I should blog about a vendor with whom I have recently developed a special information product, I will note this in a blog to avoid any appearance, real or unintended, of bias.
I have some of my retirement funds in mutual funds. Whether those funds are in technology stocks, I do not know. I do own stocks in several firms in several industries (e.g., railroads, energy). For the most part, I have limited investments in technology firms and consultancies. I used to be a partner with Andersen Consulting and had no ownership stake in the firm for many years. I frequently refer to this in my blogs and do not hide my prior association with the company. I did purchase a few shares of Accenture and Cognizant stock in late - 2008. I have sold some of those positions in late 2009. I also own a small stake in Workday that I acquired in 2012.
Readers should assume that most software conferences that I write about involved some measure of fees waived and/or travel reimbursement. Some vendors do not reimburse any costs and I eat these out of pocket. I do not charge vendors to attend these events nor will I accept payment for same. I do get reimbursed for many speaking engagements. I generally note at the end of blogs whether the vendor reimbursed me for travel expenses. Generally, this includes airfare and hotel. I do not request, receive nor accept travel perks such as first class airfare.